View more on these topics

Making allowances

An important issue in respect of the new A-Day legislation which still requires clarifi-cation is whether personal contributions in excess of an individual’s earnings to a registered pension scheme made after A-Day will count towards the annual allowance.

According to the CII, personal contributions in excess of the greater of 3,600 gross and an indiv-idual’s UK relevant earnings will not benefit from tax relief and will not count towards the annual allowance.

For example, someone earning 50,000 could make a personal contribution of 300,000 in May 2006 and, even though they would only get tax relief on 50,000 gross, they would not be subject to the annual allowance charge of 40 per cent on the 85,000 that would be in excess of the 215,000 annual allowance that will apply in 2006/07.

However, while it is clear that tax relief will not be available on any “excess” contributions, both ourselves and Scottish Life believe that the wording in FA04 and the RPSM pages on HMRC’s web-site could be interpreted as meaning that there is no reason why a contrib-ution in excess of an indiv-idual’s earnings should not count towards the annual allowance. The only exception to this rule would be where an individual dies or vests all their benefits in the scheme during the tax year in which the allowance is exceeded.

This is because the pension input amount which deter-mines the amount to be tested against the annual allowance is the total of all “relievable pension contributions” paid during the year by or on behalf of the individual plus those paid by the employer. This may, of course, look like anything over 100 per cent of salary does not count towards the annual allowance. However, if you look at the definition of “relievable pension contribution” in FA04 s188, it says: In this part, relievable pension contributions

in relation to an individual and a pension scheme means contributions by or on behalf of the individual under the pension scheme other than contributions to which subsection (3) applies.

Sub-section three specifies only contracted-out contrib-utions, contributions paid after age 75 and employer contributions (the last of which are specified as counting towards the annual allowance under s233 of FA04). Sections 190-192 then explain how tax relief will be granted on relievable contributions.

Bankhall and Scottish Life believe that this can therefore be interpreted as meaning that although all personal contributions are “relievable”, the actual relief given will be subject to the 100 per cent of earnings limit. So, when it comes to the annual allow-ance, it is the “relievable” contribution figure which is used and it is not therefore necessarily the case that tax relief will have been given on the total of these “relievable” contributions.

This would appear to make sense when you consider that someone earning 20,000 a year could win the Lottery and pay, say, 1m into a PP. While they would only get tax relief based on their 20,000 earnings (a net cont-ribution of 15,600 would be grossed up to 20,000) they will still benefit from virt-ually tax-free growth on the invested contribution and up to 25 per cent of the fund could subsequently be taken as a tax-free cash sum when the benefits are crystallised.

We wrote to HMRC and have since had written confirmation that it agrees that the legislation can indeed be interpreted in the way ourselves and Scottish Life have suggested. HMRC says this issue is being considered by its policy team.

Chris Shore

Technical adviser,

Bankhall Investment Associates,



Chasing a regulator

As Money Marketing uncovers another raft of claims manage-ment firms excesses this week, the debate is raging about who should regulate them.

NU enters premier league

Norwich Union International has launched the offshore premier portfolio bond, a unit-linked bond that provides access to virtually any investment fund the investor wants.

Tory fears over advice

Conservative MPs say that problems over the funding of advice and the regulatory framework of the NPSS need to be addressed if consensus is to be reached on pension reform. Speaking ahead of a Parliamentary debate on pensions, Tory Shadow minister for work and pensions Nigel Waterson says Turner’s recommendation for an advice-free NPSS model […]

Changes to early exit pension charges

In November last year, the FCA announced that from 31 March 2017, early exit pension charges will be capped at 1% for those customers who are eligible to access their retirement savings from age of 55. The rules also state that for new personal pension plans started after that date, or on new increments into […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers. Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm